Avoiding Pitfalls In IP Licensing

In this period of economic uncertainty, corporations must be innovative in developing strategies in order to maintain their market share and increase profits. Particular strategies to accomplish this include the following: creating intellectual property based on a company's innovation; maximizing existing assets; and partnering with others to exploit technology and innovation created outside the company. The successful implementation of these strategies by the out-licensing and in-licensing of intellectual property can serve as a safety net in today's volatile economy. Out-licensing intellectual property can create a steady income stream to offset the dips and valleys that may be present in the core business of a company without the need for overhead expenditure. Likewise, in-licensing and commercialization of another company's intellectual property can provide an influx of capital without the time, expense and unpredictability of internal development. Both out-licensing and in-licensing can prove to be beneficial for a company's economic growth and stability, but they are not without some common risk factors. These risks should be contemplated and evaluated by corporate counsel before entering into any type of out-licensing or in-licensing agreement.

Out-Licensing

In order to effectively develop a successful out-licensing program, it is essential to first implement a patent program in order to protect innovation. Companies should train their employees to always "think IP." Employees should be trained to recognize that their ideas and innovations are valuable to the company, regardless of what the employee's personal belief of the value may be. There may be creative concepts that have only a tangential relationship to a company's core asset, but which still may be worth seeking patent protection. Employees should be encouraged to innovate and relay their ideas to designated personnel within a company. One common method of stimulating this behavior is by providing a financial incentive for the recordation of invention disclosure forms. The successful creation of patent assets may result in a portfolio prime for out-licensing.

For companies with successful patent programs, it is not uncommon for a company to have one or many patent portfolios directed to technology that was never commercialized. This may be due to financial restraints, a shortage of personnel for marketing, or perhaps the technology that required further development or improvements to be commercially viable; somehow the company lacked the expertise to fill the gap. These portfolios are potentially untapped economic resources for a successful out-licensing program.

Once the creative backbone is established, it is critical that companies have a standard policy in effect for employees to assign their rights over to their employer. 35 U.S.C. § 261 governs patent assignments, which are viewed as contracts and therefore interpreted under state law. Typically, employers will require their employees to execute an assignment document for every patent application of which they are an inventor. Alternatively, some companies rely upon clauses in their standard employment agreement, which convey all rights of all inventions developed under the agreement to the employer. However, in order to minimize future disputes over intellectual property ownership, it is vital to make sure, if relying on an employment agreement, the wording is such that it expressly assigns the rights to the employer. For example, in IpVenture Inc. v. Prostar Computer, Inc . 503 F.3d 1324 (Fed. Cir. 2007), the court held that even though an inventor was under an "obligation" to assign his rights to his employer via his employment agreement, the language of the employment agreement was not drafted in such a way to actually convey ownership rights. Therefore, the inventor, not his employer, was the actual owner of the patent at issue. This is an important concept not to be overlooked by a company seeking to out-license technology. A company without proper chain of title in a patent will not be able to validly transfer its rights to another.

In-Licensing

In-licensing technology linked to a patent portfolio may be a worthwhile source for additional revenue. However, as with out-licensing, there are issues to consider prior to undertaking such a venture regardless of whether the portfolio of interest consists of hundreds of patents or a single patent.

First and foremost, it is important to verify that the company purporting to own the portfolio of interest is, in fact, the valid owner. As with out-licensing, valid assignments are critical in verifying ownership of intellectual property, as errors or omissions in assignments can become problematic down the line in the context of exclusive licenses or even litigation.

As discussed in IpVenture Inc. v. Prostar Computer, Inc ., an employment agreement may not contain the appropriate language to convey an employee's rights in intellectual property to an employer, depending on state law requirements. Therefore, absent a separate assignment document or an actual copy of an employment agreement, it is never safe to assume that a company owns the rights of all intellectual property developed by its employees simply because they have an employment agreement in place.

Another ownership issue that can occur is that of joint ownership. 35 U.S.C. § 262 governs joint ownership of patents. As stated in § 262, "[i]n the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners ." Joint ownership may be problematic if an in-licensing company is under the impression that it is receiving an exclusive license, as any other joint owners are free to use, sell or license their invention to others without regard to the licensing agreement of a co-owner.

Joint ownership is also important for determination of standing in patent litigation. All patent owners must be joined to have proper standing. Therefore, if a joint owner does not wish to assert its patent, the co-owner may be barred from asserting it as well. See IpVenture Inc. v. Prostar Computer, Inc ., discussed supra , where the issue of ownership raised questions as to whether or not IpVenture had proper standing to bring suit.

Another important in-licensing issue is whether or not the technology of interest, be it a product or a method, is actually covered by the claims of a patent portfolio which purportedly protects the technology. A patent does not give the owner the right to practice the invention; rather, it provides the owner with the right to exclude others from making, using, selling, offering for sale, or importing the patented invention for the term of the patent. ( See Herman v. Youngstown Car Mfg. Co ., 191 F. 579, 584-85 (6th Cir. 1911).) However, it is still important to determine whether the issued patent claims actually cover the technology.

The issue of a patent claim encompassing the technology of interest is not a concept to be assumed. It is not uncommon for patent claims to be narrowed during negotiations with the patent examiner during the prosecution process. If the patent prosecutor is uninformed of changes in a product or a company's strategy, this may lead to the unintended result that the patent claims do not encompass the key product.

Even if the patent claims cover the technology of interest, the scope of the claims must be properly evaluated as well. This is necessary to ensure that the claims are of sufficient breadth to encompass any obvious design modifications to the licensed-in technology. If a patent is not of sufficient scope, a competitor may be able to potentially "design around" the patent claims and commercialize a competing product. This would obviously undermine the value of such a patent.

Another key step in the diligence process is to investigate the likelihood that the patents covering the technology of interest would be upheld as valid if asserted against an infringer in court. One of the most common defenses an alleged patent infringer can raise is that the patent is invalid on the grounds of obviousness in view of a combination of prior art references. In 2007, the Supreme Court arguably raised the bar for overcoming an allegation of obviousness in patents and patent applications. In KSR v. Teleflex , 550 U.S. 398 (2007), the Supreme Court ruled that the issue of obviousness should not be solely adjudicated based on the "rigid rule" (as relied upon by the Court of Appeals of the Federal Circuit) that prior art references must contain a teaching, suggestion or motivation to be combined. Rather, the Court held that "common sense" must be relied upon when determining whether a patent claim is obvious.

This higher standard should be taken into consideration when reviewing and valuating a patent portfolio for in-licensing. Patents granted pre- KSR may be more susceptible to an obviousness attack, as arguments which were effective in overcoming rejections under 35 U.S.C. § 103(a) for obviousness during prosecution may not pass muster in a post- KSR world.

With these basic risk factors in mind, the expenditure necessary to situate a company to successfully develop an out-licensing program, and the cost of conducting a thorough diligence before in-licensing technology, may bring rewards that are many times the cost of the initial investment.

Robert J. Paradiso , Member of the Firm at Lowenstein Sandler PC, is an Intellectual Property Attorney in the Tech Group and leads the firm's life sciences patent practice. Elizabeth Pietrowski , Counsel at Lowenstein Sandler, advises clients in all aspects of intellectual property law.